Investors Bring Down Mutual Fund and ETF Costs in 2017

"Our data shows that the cheapest 20% of funds raked in nearly $1 trillion last year while the rest of the industry saw net outflows of approximately $250 billion. The message investors are sending is crystal clear—cost counts," says Patricia Oey, senior manager research analyst for Morningstar.

Morningstar’s Annual U.S. Fund Fee Study found the asset-weighted average expense ratio across U.S. open-end mutual funds and exchange-traded funds (ETFs) was 0.52% in 2017, an 8% decline from 2016.

This 8% year-over-year decline is the largest recorded since Morningstar began tracking asset-weighted fees in 2000. Morningstar estimates that investors saved more than $4 billion in fund fees in 2017 by continuing to gravitate toward lower-cost funds. This year’s asset-weighted average expense ratio is down from 0.56% in 2016 and 0.63% three years ago.

“This trend toward lower-cost funds should have an exponentially positive impact on investors’ returns in the future because costs compound over time and eat into investors’ nest eggs,” says Patricia Oey, senior manager research analyst for Morningstar. “Our data shows that the cheapest 20% of funds raked in nearly $1 trillion last year while the rest of the industry saw net outflows of approximately $250 billion. The message investors are sending is crystal clear—cost counts.”

The asset-weighted average expense ratio for passive funds fell to 0.15% in 2017 from 0.16% in 2016, a 7% decline. Morningstar says this reflected strong flows into the lowest-cost passive funds, as well as fee cuts by some asset managers for widely held, broad index funds.

The asset-weighted average expense ratio for active funds was 0.72% in 2017 from 0.75% in 2016. This 4% decline was the largest annual percentage decrease in more than a decade and Morningstar says it was driven primarily by large net flows from expensive funds to cheaper funds and secondarily by fee reductions.